Previously, the first part of this article was posted, going into detail about the new California Willful Misclassification Law of Independent Contractors and how it will effect companies. From a tax resolution perspective, it can have extreme consequences in regards to payroll taxes and the trust fund recovery penalty. Here is the second part of the article that continues the analysis.
The Spotlight Is On California Employers
Part 2 — There are so many California employers who have misclassified their workers as “independent contractors” to avoid the costs and expenses associated with payroll, overtime pay, workers’ compensation insurance, disability, and other traditional employee benefits and protections. In California, the state agency most involved with determining whether an employee is misclassified as an independent contractor is the Employment Development Department (EDD). Looking to fill the state coffers, the EDD is allowed to go back three years and seek reimbursement for unpaid payroll taxes, unemployment insurance, disability insurance, workers’ compensation insurance, and to assess both fines and penalties for violations of various California Labor Code violations
The failure to pay a terminated employee all wages due and owing in a timely fashion can subject an employer to a penalty of up to 30 times the employee’s daily wage without regard to the actual amounts of unpaid wages. Needless to say, when a worker is misclassified it is a given that the payroll taxes have not been paid. Employers who fail to pay for unemployment insurance benefits and/or state disability insurance benefits are not only required to pay the amounts not withheld, but may also be assessed a 10% penalty and interest on the unpaid contributions.
California employers should know that it does not matter that a worker signed an independent contractor agreement, or was paid as an independent contractor. Both the California Labor Commissioner and the courts will look behind any such purported agreement and examine the underlying nature of the relationship to determine whether the worker was misclassified.
Payroll Tax Liability In California Is Intensifying
California employers are strongly urged to review their employment practices. Misclassifying employees as independent contractors can have devastating consequences for your business. In an investigation, the California Employment Development Department focuses on the right of the principal to control the manner, mode, method and means of performing the actual job. The investigation is extensive and includes these five questions:
- Doe the employee have a separate occupation or business?
- Does the employee providing the service supply their own tools and the place of work?
- Is the service performed an isolated event or continuous in nature?
- Is the employee paid by the hour or by the job?
- What is the extent of actual control exercised by the principal over the manner and means of performing the services?
California payroll tax audits often lead to a finding of payroll tax fraud by the EDD. This may happen if an employer pays workers in cash over a number of years, and fails to file Forms 1099 or makes other attempts to conceal the existence of those workers. If a corporate taxpayer cannot pay the California employment taxes it owes, the EDD may hold corporate officers and stockholders who willfully fail to pay California payroll taxes personally responsible. Unlike the IRS trust fund recovery penalty for federal payroll taxes, responsible officers and shareholders will be held responsible not only for the trust fund portion of the California payroll taxes, but the entire amount of the California State employment taxes including all interest and penalties.
